McKinsey Global Institute

McKinsey Sustainability & Resource Productivity Practice

September 2013

Resource Revolution:
Tracking global
commodity markets
Trends survey 2013

The McKinsey Global Institute

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McKinsey & Companys Sustainability & Resource Productivity Practice

Greater pressure on resource systems together with increased environmental risks present
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Copyright McKinsey & Company 2013

McKinsey Global Institute

McKinsey Sustainability & Resource Productivity Practice

September 2013

Resource Revolution:
Tracking global
commodity markets
Trends survey 2013
Richard Dobbs
Jeremy Oppenheim
Fraser Thompson
Sigurd Mareels
Scott Nyquist
Sunil Sanghvi

McKinsey Global Institute

Resource Revolution: Tracking global commodity markets

Executive summary

Trends in resource prices have changed abruptly and decisively since the turn of
thecentury. During the 20thcentury, resource prices (in real terms) fell by a little
over a halfpercent a year on average. But since 2000, average resource prices
have more than doubled. Over the past 13years, the average annual volatility
of resource prices has been almost three times what it was in the 1990s.1 This
new era of high, rising, and volatile resource prices has been characterized by
many observers as a resource price super-cycle. Since 2011, commodity prices
have eased back a little from their peaks, prompting some to question whether
the super-cycle has finally come to an end. But the fact is that, despite recent
declines, on average commodity prices are still almost at their levels in 2008
when the global financial crisis began. Talk about the death of the super-cycle
appears premature.
Some of the key findings of our analysis are:
Despite intense current focus on shale gas and its impact on reducing natural
gas prices in the United States, most, if not all, resource prices remain high
by historical standardseven at a time when the world economy has not fully
emerged from its post-recession period of slow growth.
The volatility of resource prices has also been considerably higher since the
turn of thecentury. While short-term volatility is influenced by many factors,
such as droughts, floods, labor strikes, and restrictions on exports, there
also appears to be increasing evidence of a more structural supply issue
that is driving longer-term volatility. Supply appears to be progressively less
able to adjust rapidly to changes in demand because new reserves are more
challenging and expensive to access. For example, offshore oil requires more
sophisticated production techniques. Available arable land is not connected
to markets through infrastructure. Mineral resources increasingly need to
be developed in regions that have high political risks. Such factors not only
increase the risk of disruptions to supply but also make supply even more
inelastic. As supply becomes increasingly unresponsive to demand, even small
changes in that demand can result in significant changes in prices. Investors
may be deterred by the volatility in resource prices and become less inclined
to invest in new supply or resource productivity initiatives.
The prices of different resources have been increasingly closely correlated
over the past three decades.2 While rapid growth in demand for resources
from China has been an important driver of these increased links, two
additional factors are also important. First, resources represent a substantial

1 Volatility is measured by the standard deviation from the mean commodity price.
2 Correlation is measured using Pearsons correlation coefficient. It is calculated by dividing
the covariance of the two variables by the product of their standard deviations. The Pearson
correlation is +1 in the case of a perfect positive correlation and 1 in the case of a perfect
negative correlation. If the variables are independent, Pearsons correlation coefficient is 0.

proportion of the input costs of other resources. For instance, rising energy
costs in fertilizers drive higher production costs in agriculture. Second,
technology advances are enabling more substitution between resources in
final demandfor instance, biofuels link agriculture and energy markets. As a
result, shocks in one part of the resource system today can spread rapidly to
other parts of the system.
With the notable exception of shale gas, long-term supply-side costs continue
to increase. While the world does not face any near-term absolute shortages
of natural resources, increases in the marginal costs of supply appear to be
pervasive and put a floor under the prices of many commodities. At the same
time, there is no shortage of resource technology, and higher resource prices
are likely to be a catalyst for faster innovation. Technology could transform
access to both resources and its productivity. For example, 3D and 4D seismic
technology could significantly improve energy exploration, while organic
chemistry and genetic engineering could foster the next green revolution.
In theyears ahead, resource markets will be shaped by the race between
emerging-market demand and the resulting need to increase supply from
places where geology is more challenging, and the twin forces of supply-side
innovation and resource productivity.
The historical and future drivers in energy, metals, and agriculture (food and
raw materials) vary:
Energy. Prior to the 1970s, real energy prices (including those of coal,
gas, and oil) were largely flat as supply and demand increased in line with
each other. During this period, there were discoveries of new, low-cost
sources of supply, energy producers had weak pricing power, and there
were improvements in the efficiency of conversion of energy sources
in their raw state to their usable form. This flat trend was interrupted by
major supply shocks in the 1970s when real oil prices increased sevenfold in response to the Yom Kippur War and the subsequent oil embargo
by the Organization of Arab Petroleum Exporting Countries (OAPEC). But
after the 1970s, energy prices entered into a long downward trend due
to a combination of substitution away from oil in electricity generation
in Organisation for Economic Co-operation and Development (OECD)
countries, the discovery of low-cost deposits, a weakening in the
bargaining power of producers, a decline in demand after the break-up of
the Soviet Union, and subsidies. However, since 2000, energy prices (in
nominal terms) have increased by 260percent, due primarily to the rising
cost of supply and the rapid expansion in demand in non-OECD countries.3
In the future, strong demand from emerging markets, more challenging
sources of supply, technological improvements, and the incorporation of
environmental costs will all shape the evolution of prices.

3 The role of gas in the energy index is important to note. Gas represents just over 12percent of
the energy index. There has also been significant regional divergence in global gas prices, as
we describe later in this survey.

McKinsey Global Institute

Resource Revolution: Tracking global commodity markets

Metals. Real metals prices overall fell by 0.2percent (increased by

2.2percent in nominal terms) a year during the 20thcentury. However,
there was some variation among different mineral resources. Steel prices
were flat, but real aluminum prices declined by 1.6percent (increased
by 0.8percent in nominal terms) a year. The main drivers of price trends
over the lastcentury included technology improvements, the discovery
of new, low-cost deposits, and shifts in demand. However, since 2000,
metals prices (in nominal terms) have increased by 176percent on average
(8percent annually). Gold has increased the most of the major metals,
driven predominantly by investors perceptions that it represented a safe
asset class during the volatility of the financial crisis, rising production
costs, and limited new discoveries of high-grade deposits. Copper
and steel prices (in nominal terms) have increased by 344percent and
167percent, respectively, since the turn of thecentury, even taking into
account recent price falls. Many observers of these price increases have
pointed to demand from emerging markets such as China as the main
driver. However, McKinseys Basic Materials Institute finds that, while
demand from such emerging markets has played an important role, the
changing cost of supply, driven by a combination of geological issues and
input cost inflation (particularly energy), has also been an important factor
behind rising pricesbut one that has received less attention to date. In
the future, a similar set of factors as in the case of energynamely demand
from China, more challenging access to supply, logistical and skills
challenges, and the incorporation of environmental costswill all shape
metals prices.
Agriculture. Food prices (in real terms) fell by an average of 0.7percent
(increased by 1.7percent in nominal terms) a year during the 20thcentury
despite a significant increase in food demand. This was because of rapid
increases in yield per hectare due to the greater use of fertilizers and
capital equipment, and the diffusion of improved farming technologies and
practices. However, since 2000, food prices (in nominal terms) have risen
by almost 120percent (6.1percent annually) due to a declining pace of
yield increases, rising demand for feed and fuel, supply-side shocks (due
to droughts, floods, and variable temperatures), declines in global buffer
stocks, and policy responses (e.g., governments in major agricultural
regions banning exports). Non-food agricultural commodity nominal
pricesincluding timber, cotton, and tobaccohave risen by between
30 and 70percent since 2000. Rubber prices have increased by more
than 350percent because supply has been constrained at a time when
demand from emerging economies for vehicle tires has been surging.
In the future, agricultural markets will be shaped by demand from large
emerging countries such as China, climate and ecosystem risks, urban
expansion into arable land, biofuels demand, and the potential for further
productivity improvements.

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McKinsey Global Institute

September 2013
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